There are many reasons that can lead to applying for a bank loan such as buying a car, renovating a house, or going to college. Banks aren’t, however, handing out money to every borrower that comes their way as they have to ensure that the loan is repaid in full. Therefore, anyone applying for a loan must do adequate research about the terms and conditions required by the bank for its approval.
Requirements for a Bank Loan
Before you apply for a loan, you need to understand certain factors that are considered important by ta bank or lender. There are many aspects of a business or individual that are looked into by the bank. However, the following factors are the most relied upon.
- Credit score and credit history
- Income or revenues if it’s a business
- Any outstanding debt
- Assets in hand
- Purpose of acquiring the loan
The credit score is one of the most significant factors for a bank to measure the credibility of an individual or business. A well-maintained credit score shows that the person has made responsible financial choices, which basically reduces the risk of defaulting on a bank loan. Surveys indicate that approximately 60% of the people who were approved for a personal loan had a very good credit score.
Apart from having a good credit score, there are many other requirements from a bank. Banks generally have stringent requirements compared to other lending options. Here are a few tips, which can greatly increase your chances of approval from a bank.
Pay Off Previous Debt
Holding on to a large amount of debt can seriously hurt your chances of scoring a bank loan. Banks look at your debt level in terms of debt to income ratio, which signifies the amount of income that goes into paying off the debt each month. For a mortgage, the maximum debt-income allowed limit is 43%. For another kind of personal loan, you may have a bit more leverage. However, the point is that any unpaid loans hamper your chances of scoring a new one. The best course of action should be to pay off your previous loans before applying for a new one, as you will have a better chance of being approved.
Check your Credit Score
You probably won’t want to hear your bank tell you that your loan has been denied because you have a low credit score or there are anomalies in your credit report. Therefore, it is vital to check your credit report before applying for a loan. There are ways to fix your credit report if there are any issues and the best way to fix them is by seeking professional help. However, simple things like keeping older credit card accounts open and loans that have been paid in full are a great way of building up your credit score. If you detect any error in the report, reach out to the credit bureau as soon as possible and file a dispute so that it can be quickly corrected.
Ask Only for the Amount that you Need
One of the worst mistakes you can make is applying for a loan bigger than what you actually require. A bank will ask you for the purpose of acquiring the loan and they will also estimate the costs that are incurred for the specific purpose. A large discrepancy will put them in doubt of your credibility. This will eventually increase the riskiness of giving away the bank loan, which can end badly for your cause.
Another reason for stating the needed amount is that you will have to repay it all with interest. A larger amount will mean that the interest payments will also be greater. Therefore, by all means, it is not such a bright idea to ask for more than you need.
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